Payday lenders have gotten a bad rap. Critics call them predatory, usurious and accuse them of bilking desperate people in desperate straits out of thousands of dollars. But, whether or not these loan products are predatory is up for debate, and the fact is many people are using them.
Payday lending, or short-term-high-interest loans, have been on the rise in the last couple of years as many struggle to pay bills and put food on the table in a bad economy. Payday lenders say they’re providing a service that many need to bridge the gap between paychecks or unemployment checks. And increasingly banks and credit unions are agreeing with them, especially now that the interest rate on such loans has been raised from 18 to 28 percent.
Two of the major banking establishments here in California, US Bank and Wells Fargo, offer what they call “direct deposit advances” or “checking account advances.” The bank offers a loan of a couple hundred dollars with a fee for every hundred. The loan is linked to your account, so after the allotted time of the loan the bank can remove the funds they’re owed. More and more often credit unions are offering a similar service.
In the last year alone the number of credit unions offering a short term loan product jumped by nearly 60 percent. They say there’s an obvious need for quick money, and if customers can get it from their own financial institution they’re less likely to get caught in the vicious loan-default spiral that can occur at strip-mall establishments. Consumer advocates are far from convinced.
The Center for Responsible Lending recently sent a letter to federal regulators urging them to put a stop to short term lending by banks and credit unions because these types of loans increase the likelihood that consumers will stay in poor financial help. They also say the stigma that many people feel towards strip-mall lenders doesn’t exist when the loan comes from your own financial institution, and more people will find themselves in trouble.
Is that the case? Are short term loans always bad for the customer’s bottom line? Or are they a necessary product that more and more people need as the economy is slowly turning itself around? Would you be more likely to take out a payday loan if it came from your own bank?
Diana Dykstra, President and CEO, California and Nevada Credit Union Leagues
Rebecca Borne, Senior Policy Council, Center for Responsible Lending
Nessa Feddis, Vice President and Senior Counsel, American Bankers Association